A Profitable Strategy During Earnings Season

It pays to establish a trading technique that can function in any market scenario in this incredibly unpredictable market. And, with Q1 earnings set to heat up in just a week or two, this could give traders a plethora of possibilities to profit by focusing on firms that not only outperform estimates but also guide higher.

Lululemon (LULU) is a prime illustration of this technique, having produced Profits last week that were above expectations and guided higher. As a result, when the statistics were published, the stock increased by more than 13%.

I point to LULU because, following the first surge to the upside, it fell back 25 points, allowing an opportunity for investors who did not own the stock when earnings were published to participate in a trade. In addition, I've provided another possible entry point in case the stock drops much further, delivering an even greater reward-to-risk strategy.

Paychex (PAYX) was another firm that reported this week, and it both topped Forecasts and guided higher. As a result, the stock increased in value, reaching an all-time high.

What I like about this strategy is that it concentrates on the “best of the best" — that is, companies that smash profits estimates while also guiding higher, as traders tend to like winners. It is therefore a matter of allowing any initial enthusiasm to wear off while seeking for levels to enter on any pullbacks.

To put this strategy into action, you must be able to discover firms that both outperform earnings estimates and guide higher. Wall Street consensus projections in terms of both revenues and earnings are liquid and have good technical charts. In other words, the companies you want to investigate as potential trading partners.

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